Yeah, you're nuts. You've been working, what, a decade or so now? And you have about 1.5x salary invested, plus another 1.5x in equity in a rental unit.* You're doing great by normal American standards, but even your current savings is not going to get you to FIRE any time soon. And now you want to decrease your savings and increase your expenses?
A house is a consumption choice. It is not an "investment," because the only way you can realize any gains is by selling, and if it is your "dream house" you aren't going to want to sell anyway -- plus you're always going to need a place to live, and once you get used to the luxuries of said dream house, it's funny how your expectations of the kind of place you "need" change. So if/when you do sell, you're very likely to throw any gains into your next place anyway.
My rule is that any consumption choice must fit into my current budget, without affecting the savings I need to be on target to FIRE by my chosen date. I.e., if I decide I want a new house, or a StupidCar, or whatever else, it comes out of something else I would have spent money on; my savings is sacrosanct. And the fact that I would need to cut back on savings to buy something is, to me, the clearest indicator that I can't afford it, because then I would be letting a "thing" interfere with my more important priorities.
If I were you, I'd start by looking at my desired FIRE date, and figuring out what I needed to be putting away to get there by that time. That comes off the top. What you have left is what is available to spend on all of my other priorities and consumption goods.
Of course, that assumes you actually want to FIRE more than you want your wife's dream house. But this is MMM, so that tends to be the operating presumption.
Also: don't forget to consider (1) the very significant additional carrying costs for a larger/more expensive residence, and (2) the additional years you will be paying that much-higher mortgage, since you will be restarting the 30-year clock.
*I am not ignoring the very significant equity in your primary residence. It is great to have a paid-off home by the time you FIRE to minimize expenses, but home equity is not really something you can "count" as part of your 'stache unless you are prepared to sell and downsize. See discussion of "home as investment."